Ronald Coase 256px-Coase_profile_2003.jpg

In 1960, Ronald Coase published what would become one of the most cited articles in economics and contribute to his receipt of a Nobel Prize. Coase’s point was both simple and revolutionary. First, he noted, externalities—costs from economic activity borne by people not directly involved in that activity—are reciprocal: for example, a factory’s pollution that spreads to a homeowner’s backyard is a problem only because it affects the homeowner’s backyard. If, in the above example, the factory or the backyard were in different places, then there would be no externality. Second, he showed that if there were no transaction costs—the costs of completing a bargain, such as finding willing buyers and sellers, negotiating costs, and enforcement costs—the externality would be corrected by the most efficient solution, and the initial allocation of property rights would not matter.

But we do not live in a zero-transaction-costs world. Coase went on to show that when transaction costs are not zero, the initial allocation of rights may matter a great deal. In that case, a court (or some other authority) can step in, assign rights, and lower transaction costs to the point at which negotiation can happen.

“A particular 1958 episode of Have Gun – Will Travel, called “Bitter Wine,” is likely the most Coasean episode of television ever made.”

Coase’s paper “The Problem of Social Cost” appeared in the October 1960 volume of the Journal of Law and Economics. This brings us, for reasons that we will explain, to the television show Have Gun – Will Travel, which aired from 1957 to 1963. A particular 1958 episode, called “Bitter Wine,”1 is likely the most Coasean episode of television ever made. Every element of the “Problem of Social Cost” makes an appearance in the episode: the reciprocal nature of externalities, how the initial allocation of property rights matters in a world with transaction costs, and how the legal system can overcome transaction costs to allow for an efficient allocation of rights.

Have Gun – Will Travel details the adventures and exploits of a West Point graduate turned righteous hired gun, a man who calls himself Paladin. Though Paladin is clearly a man of old and classical virtues, he is also a man of up-to-date scientific learning.

Let’s begin with a synopsis of the episode, “Bitter Wine.” The tale begins at a fair in San Francisco at which Paladin serves as a judge in a competition among local vineyards. First prize goes to the Donatello vineyards. In thanking Paladin, Donatello intimates that his winery is in grave trouble, reporting: “Next year the poorest peasant will spit my wine upon the ground. It is for goats to drink.” Paladin offers his iconic business card, which reads, simply, “Have Gun – Will Travel,” to a skeptical Donatello.

Overcoming his skepticism, Donatello tells Paladin that a man has bought the land next to his vineyard and built an oil well and refinery on it. The smog from the refinery is making his grapes bitter, and the wastewater is infecting the groundwater on his land. This is a classic externality problem just asking for a Coasean resolution. Remarkably, Paladin arranges precisely that.

Paladin recognizes what Coase calls the reciprocal nature of the problem, as becomes clear from the two conversations that form the crux of the episode, one with each of the two stakeholders. First, Paladin heads over to the refinery and, after avoiding armed guards, meets the owner, Tim Gorman. When the two finally meet, Paladin asks about the heavy security. Gorman responds that Donatello has hired men to raid his well. Gorman then gives Paladin a tour of the production facility and Paladin is impressed. Although Paladin ultimately congratulates Gorman on his success, he also tells him that his well’s wastewater and smoke are damaging Donatello’s grapes. Gorman initially dismisses these concerns, stating flatly that they’re not his problem. Because Donatello hired him to solve the problem, Paladin disputes this. Gorman initially suspects that Paladin was sent to kill him, but Paladin insists that he is looking for a peaceful solution and offers one: 1) Gorman builds a sump and pumps the water over a different hill, away from Donatello (and, we’re led to presume, onto unoccupied land); and 2) Gorman builds a smoke stack that brings the smoke up, away from a downdraft and away from Donatello’s vines. Eagle-eyed readers will note here we have the first inkling of property right assignment; Paladin is arguing that Donatello has a right to have clean vines. Gorman initially sympathizes with this solution but points out he is barely making money as it is. He simply does not have the extra resources to implement this solution. Besides, Gorman continues, why should he care? Donatello has fought him every step of the way, and Gorman sees no use for wine. Paladin nods his head in appreciation of Gorman’s situation and goes to talk to Donatello.

The conversation with Gorman pairs nicely with the one that Paladin has later with Donatello. Donatello wants Paladin to lead a raid on Gorman’s rig. Paladin refuses, stating that the oil rig means as much to Gorman as the vineyard means to Donatello. Donatello scoffs at this, declaring there is no use for that “black slime.” Paladin points out two uses in Donatello’s own home: oil lamps and cleaning solutions. Donatello bemoans this fact, asking if Paladin thinks that he should let himself be ruined. Paladin responds with the same solution he mentioned to Gorman and states it can occur if Donatello lends Gorman $3,000 for construction. Donatello refuses, flatly stating that he would rather die.

It is clear to Paladin that it is only the coincidence of the vineyard and the oil rig that is problematic, and Gorman appears to understand that as well. Donatello is reluctant to think this way. This is reminiscent of Coase’s description of the sentiments of most economists2:

    The conclusions to which this kind of analysis seems to have led most economists is [sic] that it would be desirable to make the owner of the factory liable for the damage caused to those injured by the smoke, or alternatively, to place a tax on the factory owner varying with the amount of smoke produced and equivalent in money terms to the damage it would cause, or finally, to exclude the factory from residential districts (and presumably from other areas in which the emission of smoke would have harmful effects on others). It is my contention that the suggested courses of action are inappropriate, in that they lead to results which are not necessarily, or even usually, desirable.

Donatello’s sentiments betray a kind of incumbent bias leading him to frame the problem in moralistic terms, with himself on the side of the angels. Just as Coase corrected economists, Paladin endeavors to correct Donatello when he points out that “very useful things” come from oil production. Indeed, Coase’s example of the doctor and the confectioner is well-chosen insofar as people are generally favorably disposed toward both physicians and confectioners. In Coase’s example, a doctor had built an office next to a confectioner’s shop. The machinery from the confectioner’s shop was right next to the wall of the doctor’s office, and when the machinery ran, he could not treat patients due to the noise. Both the doctor and the confectioner provided a valuable service to the community. As both Coase and Paladin understood and struggled to get others to understand, the principle is the same.

As Paladin notices, seeing this conflict as a morality tale results in wasted resources. Donatello hires gunmen to end Gorman’s operations, and Gorman hires guards to prevent Donatello from raiding him. Likewise, the men’s anger toward each other indicates that substantial transaction costs need to be overcome before any bargain can take place.

While Paladin is away, seeing a lawyer to draw up the literal Coasean bargaining that Donatello and Gorman do not yet realize they need, Donatello, refusing to bargain, leads an attack on Gorman’s facility. Two men are killed, and his forces are routed. Gorman’s men give chase. Paladin arrives just in time to prevent further bloodshed and forces Gorman to recall his men at the point of his gun. The battle is ultimately a stalemate, but given that Gorman still is polluting, it is, de facto, a loss for Donatello.

As a chastened Donatello resigns himself to his fate, Paladin requests a keg of his wine. An indifferent Donatello permits it, as “nothing matters anymore.” Paladin places the wine in a conspicuous location near Gorman’s oil well. Gorman’s men overindulge and fall asleep, in essence, reducing some of the bargaining transaction costs. Paladin takes advantage of that fact and brings Donatello to Gorman’s oil well. Paladin lights a torch, climbs up to the top of the oil well, and holds it over the well. Gorman points a rifle at him, giving him five seconds to drop the torch. Paladin calls Gorman’s bluff, stating that if he is shot, the whole place will go up in flames. After five seconds, it becomes clear that Gorman will not shoot. Paladin reaches into his coat pocket and tosses the lawyer’s contract to the ground (i.e., an explicit assignment of property rights and subsequent negotiation on how to solve the issues). Donatello, not quite grasping the situation, still refuses to sign, telling Paladin to drop the torch. Paladin points out that an oil fire is uncontrollable. If he drops the torch, Donatello’s vineyard will also go up in flames. Suddenly, Donatello gets it: the game has changed. The cost of not negotiating has skyrocketed; it’s high enough for even these two enemies to negotiate. Relatively speaking, the transaction costs have fallen: first, because of the clear assignment of rights and, second, because of the threat of losing everything. Donatello and Gorman agree to become partners.

The elements of Coase are clear in this episode. First, externalities are reciprocal. Gorman’s wastewater and soot are issues only because they flow onto Donatello’s land. There is no issue when they are pumped onto unoccupied land. Second, the initial allocation of rights matters when the transaction costs are high: since neither Donatello nor Gorman was willing to negotiate, given their hatred of each other, an initial allocation of property rights giving Donatello the right to grow pollution-free vines had to occur before the negotiation could begin. Third, the legal system can overcome transaction costs to ensure an efficient allocation of resources. Paladin, once the rights were defined, was able to raise the cost of not negotiating to the point where it was more costly not to negotiate than to deal with a hated enemy. While it is true this solution was not entirely peacefully gained (two men died in Donatello’s raid on Gorman’s camp and Paladin had to threaten to burn the whole valley to the ground in an oil fire), ultimately, a reduction in violence was achieved with this solution rather than with the status quo position of Gorman and Donatello raiding each other.

Footnotes

[1] “Bitter Wine.” Season 1, episode 23, Feb. 14, 1958 of Have Gun – Will Travel. Written by Ken Kolb; created by Herb Meadow and Sam Rolf. IMDb.com.

[2] Coase, R. (1960). “The Problem of Social Cost.” Journal of Law & Economics. 3(1): 1-44. Abstract. Reprinted in Chapter 5 of Classic Papers in Natural Resource Economics, Chennat Gopalakrishnan ed., pp. 87-137, at Springer.com.

*Jon Murphy is a Ph.D. economics students at George Mason University, where he specializes in Law & Economics and Smithian Political Economy. He previously was an economic consultant in New Hampshire.

For more articles by Jon Murphy, see the Archive.

John Schuler is a Ph.D. economics student at George Mason University who specializes in the interface of computer science and economics. In the spring of 2018, he was a visiting assistant professor at Washington College.